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UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


Price  Standardization 


Modem  American  Law  Lecture 


ilackstone  Institute,  Chicago 


PRICE  STANDARDIZATION 


BY 

GEORGE  SUTHERLAND,  LL.D. 


One  of  a  Series  of  Lectures  Especially  Prepared 
for  the  Blackstone  Institute 


BLACKSTONE     INSTITUTE 
CHICAGO 

Copyright,    1920,    by    Blackstone    Institute 


T 


GEORGE  SUTHERLAND 


GEORGE  SUTHERLAND 

George  Sutherland  is  of  Scotch-English  descent, 
born  in  Buckinghamshire,  England,  1862.  Was 
educated  in  schools  of  Utah  and  law  department, 
University  of  Michigan.  Was  admitted  to  the  bar 
in  1883,  and  has  been  in  the  active  practice  of  his 
profession  ever  since  except  while  a  member  of  the 
United  States  Senate. 

He  was  State  Senator  in  the  first  legislative 
assembly  after  the  admission  of  Utah  as  a  state  in 
1896,  serving  as  chairman  of  the  Judiciary  Com- 
mittee in  that  body.  Was  elected  to  the  House  of 
Representatives  of  the  57th  Congress  in  1900. 
After  serving  one  term  declined  renomination ;  was 
elected  United  States  Senator  in  1905  and  was 
reelected  in  1911,  his  term  of  office  expiring  March 
4th,  1917.  Was  chairman  of  the  Federal  Commis- 
sion on  Workman's  Compensation  in  1912-13.  Was 
a  member  of  the  joint  committee  which  prepared 
the  existing  Criminal  Code  and  Judicial  Code  of 
the  United  States.  (Served,  among  other  Senate 
Committees,  on  Judiciary  and  Foreign  Relations.) 
Received  degree  of  Doctor  of  Laws  from  Columbia 
University,  New  York,  and  also  from  the  Univer- 
sity of  Michigan.  Was  President  of  the  American 
Bar  Association  for  the  year  1916-1917. 

Along  with  his  other  activities,  Mr.  Sutherland 
has  found  time  to  take  an  active  part  in  the  inves- 
tigation and  discussion  of  current  problems  affect- 
ing business.  Price  Standardization  has  been  a 
much  mooted  subject  and  the  reader  will  find 
herein  a  comprehensive  discussion  of  the  topic  from 
all  angles. 


PRICE  STANDARDIZATION 

By 

George  Sutherland,  LL.D.* 

INTRODUCTION 

As  business  grows  in  volume  and  complexity,  the 
problem  of  determining  when  and  how  far  competition 
should  be  restricted  and  regulated,  and  when  it  should 
be  left  entirely  free,  increases  in  difficulty.  That 
** Competition  is  the  life  of  trade"  has  hitherto  been 
regarded  as  an  economic  truism,  accepted  by  courts, 
as  the  governing  principle  of  judicial  decision,  and  by 
legislatures,  as  the  guiding  rule  for  legislative  action. 
The  axiom  lies  at  the  basis  of  our  anti-trust  laws — 
State  and  Federal.  The  State  and  inferior  Federal 
courts  have  recognized  few  exceptions  to  the  rule  that 
price  fixing  by  general  agreement  or  understanding  is 
unlawful,  and  the  Supreme  Court  of  the  United 
States,  in  recent  decisions,  has  eluninated  these  excep- 
tions almost  to  the  vanishing  point.  The  rule,  as  ap- 
plied to  unbranded  or  otherwise  unidentified  goods, 
is  perhaps  not  challenged  by  any  one,  but  there  is  a 
very  wide  sentiment  that,  as  applied  to  ^ identified" 
goods,  the  rule  has  been  pushed  too  far  and  is  econom- 

*  The  author  is  glad  to  acknowledge  the  valuable  assistance  he  has 
received  in  the  preparation  of  this  Lecture  from  the  very  complete  research 
work  of  Mr.  Harry  S.  Gleick  of  the  St.  Louis  bar. 

5 


6  MODERN  AMERICAN  LAW  LECTURE 

ically  unsound.  This  has  given  rise  to  a  demand  for 
legislation  which  will  legalize,  under  certain  condi- 
tions and  restrictions,  the  fixing  and  maintenance  of 
prices  of  goods  of  this  character. 

The  discussion  of  the  matter  has  not  only  been 
widely  extended,  but  is  becoming  highly  controversial, 
if  not  acrimonious.  The  controversy,  in  the  main,  has 
centered  about  the  so-called  Stephens- Ashurst  Price 
Maintenance  Bill  (originally  introduced  in  the  63rd 
Congress,  and  known  as  the  Stevens  Bill),  to  which 
I  shall  have  occasion  to  refer  further  along. 

THE  MEANING  AND  SCOPE  OF  PRICE 
STANDARDIZATION 

The  purpose  of  price  maintenance — or  standardiza- 
tion— is  to  enable  the  manufacturer  or  producer  of  a 
given  article  to  control  the  price  for  which  the  article 
shall  be  sold  by  the  retailer  to  the  consumer.    The 
advocates  of  the  system  do  not  claim  that  it  should 
apply  to  all  articles  of  trade,  but  only  to  such  as  are 
identified  by  patent,  copyright,  distinctive  trade  mark 
or  other  device,  so  as  to  clearly  set  them  apart  from  all 
other  articles  of  the  same  kind  or  class.  For  example, 
if  a  manufacturer  engaged  in  making  a  special  sort 
of  breakfast  food,  disposes  of  it  to  the  jobber  or  re- 
tailer in  bulk,  with  nothing  to  distinguish  it  from 
other  breakfast  foods  of  the  same  kind,  he  may  not  fix 
the  price  at  which  it  is  to  be  resold  to  the  consumer ; 
but,  it  is  contended,  if  he  puts  it  up  in  packages  bear- 
ing a  special  brand,  or  trade  mark,  as  "Quaker  Oats" 
or  "Hecker's  Cream  of  Wheat,"  he  should  be  allowed 
to  control  the  price  at  which  the  retail  dealer  shall  sell 


PRICE  STANDARDIZATION  7 

it  to  his  customers.  In  the  same  way,  it  would  seem, 
if  apples  are  put  on  the  market  in  the  ordinary  way, 
an  agreement  between  producer  or  wholesaler  and 
retail  dealer  that  they  are  to  be  sold  only  at  a  stipu- 
lated price,  would  be  legally  and  economically  objec- 
tionable, but  quite  otherwise  if  the  apples  be  put  up 
in  separate  packages  or  cartons  bearing  a  distinctive 
mark  or  brand.  Indeed,  the  distinction,  once  admit- 
ted, will  hold  good  as  to  practically  every  article  of 
commerce.  The  question,  therefore,  becomes  one  of 
vast  importance,  since  it  potentially  affects  the  entire 
field  of  mercantile  distribution. 

The  subject  naturally  presents  itself  from  two  gen- 
eral points  of  view,  first,  from  the  legal  and,  second, 
from  the  economic  standpoint,  and  these  will  now  be 
considered  in  their  order. 


THE  LEGAL  ASPECT  OF  PRICE  STANDARDIZATION 

Common  latv  rule. — Under  the  common  law,  as  it 
came  to  us  from  England,  all  contracts  in  unreason- 
able restraint  of  trade  were  absolutely  void.  In  the 
earliest  English  cases  dealing  with  the  subject,  the 
doctrine  seems  to  have  been  maintained  that  any  re- 
straint whatsoever  was  invalid.  There  is  an  interest- 
ing case  which  arose  in  the  time  of  Henry  V  (1414), 
where  a  weaver  had  impulsively  bound  himself  for  a 
small  consideration  not  to  follow  his  craft  within  the 
town  for  a  limited  time.  Subsequently,  and  before  the 
expiration  of  the  time,  his  necessities  sent  him  to  the 
loom ;  whereupon,  an  action  for  damages  was  brought 


8  MODERN  AMERICAN  LAW  LECTURE 

on  the  bond.  Not  only  was  the  obligation  held  to  be 
void  but  apparently  the  participation  of  the  plaintifi 
was  thought  to  be  criminal,  the  learned  judge  who 
decided  the  case,  with  a  somewhat  startling  display 
of  feeling,  saying : 

*^The  obligation  is  void  as  being  contrary  to  the 
common  law  and  by  God  if  the  plaintiff  were  here  he 
should  go  to  prison  until  he  paid  a  fine  to  the  King.'' 
Diers  Case,  2  Henry  V,  p.  5,  pi.  26. 

The  strictness  of  the  ancient  rule  was,  however, 
modified  by  later  decisions,  beginning  in  the  17th  cen- 
tury with  the  case  of  Mitchell  v.  Reynolds,  1  Peere 
Williams  181,  where,  however,  Parker,  C.  J.,  refer- 
ring to  Diers  Case,  approves  the  indignation  of  the 
Judge,  *  ^  tho '  not  his  manner  of  expressing  it. ' '  At  the 
time  of  the  Revolution  the  rule  had  become  firmly 
established  in  accordance  with  the  statement  made 
above,  and  was  adopted  by  us  along  with  the  other 
doctrines  of  the  common  law. 

Subsequent  development  of  rule. — The  subsequent 
development  of  the  law,  both  in  England  and  the 
United  States,  has  been  influenced,  to  a  greater  or  less 
degree,  by  two  partially  antagonistic  considerations 
(1)  the  freedom  of  contract,  that  is,  the  right  of  the 
individual  to  determine  for  himself  the  agreements 
he  shall  make,  and  (2)  the  doctrine  of  free  competi- 
tion, which  regards  any  restraint  upon  trade  with 
jealousy.  The  rule  with  relation  to  restraints  of  trade 
has  been  relaxed,  or  contracted,  according  to  which  of 
these  two  considerations  has  exercised  a  controlling 
influence  on  the  mind  of  the  tribunal  dealing  with  the 
subject.    Until  recent  years,  at  least,  our  own  courts 


PRICE  STANDARDIZATION  9 

and  legislative  bodies  seem  to  have  been  led  by  the 
second,  rather  than  by  the  first,  of  these  considera- 
tions. There  are  indications,  however,  that,  so  far  as 
legislation  is  concerned,  the  pendulum  has  begun  to 
swing  in  the  other  direction,  as  evidenced  by  certain 
provisions  of  the  Clayton  Anti-Trust  law,  the  Trade 
Commission  law  and  other  enactments. 

It  is  not  necessary  to  enter  upon  a  discussion  of  the 
development  of  the  law  relating  to  the  general  sub- 
ject of  restraint  of  trade,  since  we  are  now  dealing 
with  the  question  only  so  far  as  it  affects  the  main- 
tenance of  prices  of  identified  goods,  the  law 
concerning  which  is  a  matter  of  quite  recent  growth. 

The  question  which  is  presented  is,  ''Do  contracts 
or  other  arrangements  which  seek  to  fix  prices  at 
which  identified  goods  must  be  sold  by  retail  dealers 
to  consumers  fall  within  or  without  the  rule  which 
forbids  unreasonable  restraints  of  trade?" 

ELEMENTS  AFFECTING  QUESTION 

The  legal  question  may  be  affected  by  the  method 
under  which  prices  are  sought  to  be  standardized,  that 
is  whether  by  contract  or  by  notice,  or  other  contriv- 
ance not  involving  an  agreement  between  the  producer 
and  the  retailer.  These  methods  may  be  summarized 
as  follows : 

1.  The  producer  of  the  given  article  formally 
agrees  with  the  retail  dealer  that  the  article  shall  bt 
sold  only  at  a  specified  price,  or  with  the  jobber  oi 
middleman,  that  he  shall  furnish  the  article  only  to 
such  retail  dealers  as  will  sell  at  the  specified  price. 

2.  The  producer  stamps  or  prints  the  retail  price 


10  MODERN  AMERICAN  LAW  LECTURE 

upon  the  article  or  upon  a  label  attached  thereto,  or 
otherwise  gives  notice  that  the  article  is  to  be  sold  only 
at  the  specified  price. 

3.  The  producer  does  not  attempt  to  bind  the 
dealer  to  maintain  any  specified  price,  but  makes  it 
worth  his  while  to  do  so  by  giving  rebates  or  other 
valuable  inducement. 

4.  The  producer  attaches  to  the  article  a  notice 
that  if  it  be  sold  for  less  than  the  specified  price,  the 
manufacturer's  name  must  not  be  used  in  connection 
with  the  article,  but  must  be  erased  or  eliminated 
therefrom. 

5.  The  producer  markets  the  goods  through  sell- 
ing agents,  or  agencies,  retaining  title  in  himself. 

6.  The  producer  seeks  to  bring  about  the  result 
indirectly,  by  requiring  the  retailer  to  sell  at  the  fixed 
price  and,  if  he  fail  to  do  so,  refusing  thereafter  to 
furnish  him  with  goods. 

There  are  four  general  classes  of  articles  falling 
within  the  description  of  identified  goods  which  have 
been  considered  in  dealing  with  the  legal  side  of  the 
problem :  (a)  Articles  protected  by  patent ;  (b)  arti- 
cles protected  by  copyright;  (c)  articles  manufac- 
tured under  a  secret  process  or  formula,  and  (d) 
articles  put  out  under  a  trade  mark  or  special  mark 
or  brand. 

PRICE  MAINTENANCE  BY  CONTRACT 

The  attempt  to  standardize  prices  by  contract  may 
be  made  either  by  a  single  contract  between  the  manu- 
facturer and  the  dealer,  whereby  the  dealer  agrees 
to  sell  at  the  stipulated  price,  or  by  a  ''system"  of 


PRICE  STANDARDIZATION  11 

contracts  made  with  all  or  a  large  number  of  jobbers 
or  dealers,  so  as  to  control  prices  generally  and  re- 
strain competition.  I  do  not  know  of  any  case  which 
holds  that  a  single  contract  made  between  the  manu- 
facturer and  a  retail  dealer,  by  which  the  latter  is 
bound  to  sell  only  at  a  fixed  price,  is  unlawful.  There 
would  seem  to  be  no  view  of  the  rule  against  restraints 
of  trade  which  would  render  such  an  agreement 
obnoxious  to  the  principle  of  that  rule.  The  scope  and 
effect  of  such  a  contract  are  so  limited  and  the  conse- 
quent restraint  so  slight,  that  it  can  hardly  be  said  to 
be  an  unreasonable  restraint.  However,  such  a  con- 
tract is  binding  only  upon  the  parties  to  it.  The  rule 
with  reference  to  restraints  upon  the  alienation  of  real 
property  does  not  apply  to  personal  property,  except 
when  of  an  unusual  character,  such  as  an  heirloom ; 
hence,  the  subsequent  purchaser  at  a  less  price  than 
that  fixed  by  the  contract  would  not  be  affected. 

The  discussion  which  follows,  therefore,  is  with 
reference  to  a  situation  involving  a  "system"  of  con- 
tracts, or  amounting  to  a  combination  or  general 
scheme  to  maintain  prices.  The  means  by  which  such 
a  result  is  sought  w^ould  seem  to  be  iimnaterial,  for  as 
said  by  the  Court  in  Brent  v.  Gay,  149  Ky.  615,  626 : 
"And  so  taking  for  a  foundation  the  principle  that 
illegal  and  unreasonable  restraint  of  trade  is  obnox- 
ious to  the  spirit  of  the  law,  the  range  of  this  principle 
will  be  extended  to  meet  the  requirements  of  today 
and  to  embrace  every  condition  in  which  an  unlawful 
attempt  is  made  to  restrain  trade  and  control  the 
market  and  suppress  competition  by  whatever  means 
these  ends  are  sought  to  he  accomplished/' 


12  MODERN  AMERICAN  LAW  LECTURE 

The  English  Rule 

It  is  to  be  observed,  in  the  first  place,  that  the  devel- 
opment of  the  law  relating  to  restraints  of  trade  in 
England  and  in  the  United  States,  has  not  proceeded 
along  altogether  parallel  lines.    As  already  stated,  our 
courts  and  legislatures  have  been  influenced  by  the 
theory  which  teaches  the  great  desirability  of  competi- 
tion.   On  the  other  hand,  the  English  courts  seem  to 
have  given  more  weight  than  we  to  the  doctrine  of 
laissez  fairs — the  freedom  of  contract — the  right  of 
the  individual  to  govern  his  private  affairs  in  his  own 
way.    The  general  tendency,  therefore,  of  the  English 
cases  has  been  in  the  direction  of  relaxing  rather  than 
of  making  more  rigid  the  rule  against  restraints  of 
trade.    Contracts  are  upheld  by  the  English  judges 
which  would  be  declared  unlawful  in  this  country. 
We  should,  therefore,  expect  to  find  that  the  English 
courts  have  dealt  less  strictly  than  our  ot\ti  with  at- 
tempts by  contract  or  otherwise  to  fix  and  maintain 
prices.    In  Elliman  Sons  &  Company  v.  Carrington 
&  Son  Ltd.,  2  Ch.  Div.  (1901)  275,  there  was  involved 
an  agreement  by  which  the  defendant  was  bound  not 
to  resell  the  goods  (proprietary  or  so-called  "patent" 
medicines)  purchased  from  plaintiff  at  less  than  a 
fixed  price  and,  if  resold  to  the  trade,  to  secure  an 
agreement  with  the  retailer  that  he  would  not  sell  at 
less  than  the  stipulated  price.    Upon  an  action  for  the 
breach  of  the  latter  condition,  the  court  held  the  con- 
tract valid.     There  are  other  English  cases  to  the 
same  effect,  and  the  rule  seems  to  be  established  that 
such  contracts  are  not  in  illegal  restraint  of  trade. 


PRICE  STANDARDIZATION^  13 

With  regard  to  patented  articles,  the  same  doctrine 
is  maintained  where  the  restriction  as  to  resale  price 
is  sought  to  be  imposed  by  notice  as  distinguished 
from  contract,  National  Phonograph  Co.  v.  Menck 
(1911)  104L.T.5. 

In  Incandescent  Gas  Light  Co.  v.  Cortelo,  12  Pat. 
Cas.  262,  the  Court  said:  "Inasmuch  as  he  has  the 
right  to  prevent  people  from  using  them  or  dealing 
in  them  at  all,  he  has  the  right  to  the  lesser  thing, 
that  is  to  say,  to  impose  his  own  conditions.  It  does 
not  matter  how  unreasonable  or  how  absurd  the  con- 
ditions are." 

But  the  rule  is  otherwise  as  to  non-patented  arti- 
cles. In  such  case  a  restriction  sought  to  be  imposed 
by  notice  cannot  be  enforced,  Taddy  &  Co.  v.  Sterious 
(1904)  1  Ch.  354;  McGruther  v.  Pitcher  (1904)  2  Ch. 
306. 

The  distinction  was  recognized  in  National  Phono- 
graph Co.  V.  Menck,  supra,  where  the  court,  speaking 
of  ordinary  goods  as  distinguished  from  patented  arti- 
cles, said:  "The  owner  may  use  and  dispose  of 
these  as  he  thinks  fit.  He  may  have  a  certain  contract 
with  the  person  from  whom  he  bought  and  to  such  a 
contract  he  must  answer,  simptly,  however,  in  his 
capacity  as  owner ;  he  is  not  bound  by  any  restriction 
in  regard  to  the  use  or  sale  of  the  goods,  and  it  is  out 
of  the  question  to  suggest  that  restrictive  conditions 
run  with  the  goods. ' ' 

The  American  Rule 

While  some  of  the  decisions  in  the  State  and  lower 
Federal  courts  have  followed,   approximately,   the 


r4  MODERN  AMERICAN  LAW  LECTURE 

English  rule,  the  general  trend  is  in  the  direction  of  a 
more  rigid  interpretation  of  the  restraint  of  trade 
doctrine,  as  applied  to  price  fixing  and  maintenance. 
These  decisions  naturally  separate  themselves  into 
those  dealing  with  articles  protected  by  patent,  those 
protected  by  copyright,  and  those  put  out  under 
special  brands  or  trade  marks  or  otherwise  identified, 
including  such  as  are  made  under  secret  process  or 
formula. 

Articles  protected  by  patent. — Prior  to  the  deci- 
sions of  the  Supreme  Court  of  the  United  States, 
hereafter  referred  to,  the  rule  seems  to  have  been  well 
established  in  the  lower  Federal  courts  that  the  pat- 
entee might  lawfully  impose  restrictions,  not  only 
respecting  the  use  of  his  invention,  but  also  upon  the 
price  at  which  it  should  be  resold,  and  that  such  re- 
strictions would  be  binding  upon  the  dealer  with 
knowledge,  or  upon  one  who  had  entered  into  contract- 
ual relations  under  which  he  had  become  bound  to 
maintain  the  stipulated  prices.  It  was  held  that  a 
sale  at  a  less  price  than  that  fixed  by  the  owner  of  the 
patent,  constituted  an  infringement  of  the  patent, 
which  would  sustain  an  action  in  tort,  and,  where  the 
restrictions  were  the  subject  of  contract,  an  action  for 
breach  of  contract  as  well.  In  either  case,  it  was  said, 
the  rule  of  the  common  law  respecting  monopolies  and 
restraints  of  trade  had  no  application,  since  the  pur- 
pose of  the  patent  was  to  give  the  patentee  an  exclu- 
sive monopoly  in  making,  using,  and  vending  the 
patented  device.  The  first  case  announcing  this  doc- 
trine was  Edison  Phonograph  Co.  v.  Kaufmann,  105 
Fed.  Rep.  960,  where  it  was  held  that  the  act  of  selling 


PRICE  STANDARDIZATION  15 

at  less  than  the  fixed  price  constituted  an  infringe- 
ment of  the  patent.  This  case  and  later  cases  to  the 
same  effect,  proceeded  upon  the  theory  that  the  pat- 
entee had  the  statutory  right  to  condition  the  use  of 
his  device,  and  the  limitation  upon  the  resale  price 
constituted  such  a  condition.  The  cases  are  reviewed 
by  Judge,  afterward  Justice,  Lurton,  in  John  D.  Park 
&  Sons  Co.  V.  Hartman,  153  Fed.  Rep.  24,  27-28,  and 
the  conclusion  reached  that  *^  contracts  restraining 
subsequent  sales  or  use  of  a  patented  article  which 
would  contravene  the  coimnon  law  rules  against 
monopolies  and  restraint  of  trade,  if  made  in  respect 
of  unpatented  articles,  are  valid  because  of  the  monop- 
oly granted  by  the  patent." 

The  decisions  of  these  Federal  courts  have,  how- 
ever, been  completely  upset  by  the  Supreme  Court 
of  the  United  States.  In  the  case  of  Henry  v.  Dick 
Co.,  224  U.  S.  1,  that  court  distinguished  the  patent 
law  from  the  copyright  law,  in  respect  to  the  "use" 
of  the  thing  which  is  the  subject  of  the  patent  or  copy- 
right ;  in  the  former,  the  patentee  being  given  the  ex- 
clusive right  of  "use,"  in  the  latter,  no  such  right  be- 
ing accorded.  In  that  case  a  patented  mimeograph 
which  had  been  sold,  bore  a  printed  notice  that  it  was 
to  be  used  only  with  ink  and  other  supplies  made  by 
the  owners  of  the  patent.  Bauer  &  Co.,  with  full 
knowledge  of  the  restriction,  sold  to  the  purchaser  a 
can  of  ink  suitable  for  use  and  intended  to  be  used 
with  the  machine.  The  court  held  this  to  be  an  unau- 
thorized interference  with  the  right  of  exclusive 
"use"  and  an  infringement  of  the  patent.. 

Subsequently,  there  came  to  the  Supreme  Court 


16  MODERN  AMERICAN  LAW  LECTURE 

a  case  involving  the  right  of  a  patentee  to  limit  by 
notice  the  price  at  which  the  patented  article  might 
be  sold  by  a  retailer,  the  full  price  therefor  having 
been  paid  to  the  agent  of  the  patentee,  Bauer  v. 
O'Donnell  (The  "Sanatogen"  Case),  229  U.  S.  1. 

The  opinion,  delivered  by  Justice  Day,  four  Jus- 
tices dissenting,  points  out  the  distinction  between 
the  right  of  exclusive  "use,"  involved  in  the  Dick 
case,  and  the  right  to  dictate  the  price  at  which  sub- 
sequent sales  shall  be  made,  and  holds  the  attempted 
restrictions  to  be  futile.  The  rule  established  by  this 
case  is  that  the  patent  law  gives  the  patentee  the  ex- 
clusive right  to  sell:  it  does  not  give  him  the  right  to 
control  the  price  at  which  another  shall  sell,  who  has, 
by  purchase,  acquired  the  full  title  to  the  patented 
article.  The  case  does  not  hold  that  the  patentee 
who  sells  the  exclusive  right  to  sell,  as  distinguished 
from  the  article  itself,  may  not  restrict  the  price  and 
this  would  seem  to  be  a  lawful  exercise  of  his  rights 
under  the  patent  law.  The  distinction  is  pointed  out 
in  Ford  Motor  Co.  v.  Union  Motor  Sales  Co.,  225 
Fed.  Eep.  373,  379,  which  case  also  holds  (p.  383) 
that  the  rule  established  by  the  "Sanatogen"  case, 
applies  to  price  restrictions  attempted  by  notice,  by 
contract,  or  in  any  other  way.  The  very  full  effect 
thus  given  to  this  decision  is  not  conceded  by  other 
Federal  judges.  See  American  Graphophone  Co.  v. 
Boston  Store,  225  Fed.  Rep.  785,  787,  where  it  is  held 
that  there  is  no  real  distinction  between  a  sale  of  the 
right  to  sell  and  the  sale  of  the  article  with  terms  of 
resale,  and  consequently  that  the  agent  or  vendee  of 
the  patentee  may,  by  ** direct  agreement,"  be  bound 


PRICE  STANDARDIZATION  17 

to  observe  the  price  restriction,  imposed  as  a  condi- 
tion of  the  sale. 

Articles  protected  by  copyright. — The  decisions  of 
the  inferior  Federal  courts  left  the  question  respect- 
ing the  legality  of  attempts  to  fix  and  maintain  prices 
of  copyrighted  articles  in  some  confusion.  In  the 
case  of  Park  &  Sons  v.  Hartman,  supra,  Justice  Lur- 
ton,  while  clear  in  his  statement  of  the  law  applicable 
to  patented  articles,  said,  *' There  are  such  wide  dif- 
ferences between  the  right  of  multiplying  and  vend- 
ing copies  of  a  production  protected  by  the  copyright 
statute  and  the  rights  secured  to  an  inventor  under 
the  patent  statutes,  that  the  cases  which  relate  to  the 
one  subject  are  not  altogether  controlling  as  to  the 
other."  He,  however,  adds  that  the  copyright  stat- 
utes would  seem  to  take  ''direct  contracts"  between 
publisher  and  vendee  in  respect  to  price  outside  the 
rule  as  to  restraints  of  trade  which  might  otherwise 
apply.  In  Bobbs  Merrill  Co.  v.  Straus,  210  U.  S.  339, 
the  Supreme  Court  held  that  the  owner  of  the  copy- 
right had  no  right  by  virtue  of  the  copyright  act  to 
impose  hy  notice,  a  limitation  of  price  at  which  a 
book  should  be  resold.  In  Straus  v.  American  Pub- 
lishing Association,  231  U.  S.  222,  the  court  went 
further  and  said  that  the  copyright  act,  no  more  than 
the  patent  statute,  was  intended  to  authorize  agree- 
ments in  unlawful  restraint  of  trade,  etc.  This  case 
involved  a  combination  of  booksellers  to  sell  copy- 
righted books  to  those  only  who  would  maintain  the 
retail  price. 

Identified  goods  not  patented  or  copyrighted. — As 
to  proprietary  articles,  or  articles  made  under  secret 


18  MODERN  AMERICAN  LAW  LECTURE 

process  or  formula,  the  decisions  in  the  lower  Fed- 
eral courts  were  conflicting,  the  majority  apparently 
holding  that  the  rule  with  reference  to  patented  arti- 
cles should  apply.  Justice  Lurton  in  Park  &  Sons 
Co.  V.  Hartman,  supra,  vigorously  contending  to  the 
contrary,  held  that  a  "system"  of  contracts  by 
which  the  manufacturer  of  a  medicine  made  under  a 
secret  formula,  not  patented,  undertook  to  maintain 
uniform  prices,  was  invalid.  In  Dr.  Miles  Medical 
Co.  V.  John  D.  Park  &  Sons  Co.,  220  U.  S.  373,  the 
Supreme  Court  followed  the  view  of  Justice  Lurton 
and  held  such  an  arrangement  void  both  at  common 
law  and  under  the  Federal  Anti-Trust  Act,  Mr.  Jus- 
tice Holmes  alone  dissenting.  Mr.  Justice  Hughes, 
in  delivering  the  opinion  of  the  Court,  said  that 
where  '^  commodities  had  passed  into  the  channels  of 
trade  and  are  owned  by  dealers,  the  public  is  en- 
titled to  whatever  advantage  may  be  derived  from 
competition  in  the  subsequent  traffic." 

The  case  of  the  United  States  v.  Kellogg  Toasted 
Corn  Flakes  Co.,  222  Fed.  Rep.  725,  was  decided  soon 
after  the  last  mentioned  decision,  and  it  was  there 
held  that  a  manufacturer  of  a  product  in  a  patented 
carton,  in  connection  with  an  absolute  sale,  could  not 
control  the  price  at  which  the  package  should  be  sub- 
sequently resold  by  the  jobber  or  retailer,  *' without 
regard  to  the  garb  in  which  the  acts  were  clothed." 

Summary 

It  may  therefore,  I  think,  be  regarded  as  definitely 
settled  by  the  decisions  of  the  Supreme  Court  that  no 
systematic  attempt  to  fix  prices  by  agreement,  under- 


PRICE  STANDARDIZATION  19 

standing,  or  otherwise  can  be  made  effectual;  but 
every  such  effort  is  invalid  both  at  common  law  and 
under  the  Anti-Trust  law,  whether  the  article  af- 
fected be  protected  by  patent  or  copyright,  manufac- 
tured under  secret  process  or  formula,  or  be  put  out 
under  trade  mark,  special  brand  or  other  identifica- 
tion. 

Rebates  and  Other  Inducements 

When,  however,  the  arrangement  takes  the  form 
of  a  mere  inducement  to  the  retailer  to  observe  the 
prices  fixed  by  the  manufacturer  it  would  seem  not 
to  be  unlawful,  though  affording  no  basis  for  an  ac- 
tion if  disregarded.  In  re  Green,  52  Fed.  Rep.  104. 

In  this  case  it  w^as  held  that  a  promise  to  pay 
retailers  a  rebate  to  maintain  the  prices  fixed  by 
the  manufacturer  was  not  unlawful.  The  article 
involved  was  distilled  alcohol,  probably  not  "identi- 
fied." The  opinion  was  delivered  by  Jackson,  Cir- 
cuit Judge,  who  held,  first,  that  the  means  adopted 
did  not  constitute  a  "contract,  combination,  or  con- 
spiracy in  restraint  of  trade, ' '  but  simply  an  induce- 
ment to  the  dealer  not  to  sell  at  a  price  less  than  that 
fixed,  w^hich  he  was  at  liberty  to  accept  or  disregard. 
It  was  further  said,  however,  that  if  the  arrange- 
ment could  be  construed  as  a  contract  it  could  not  be 
held  to  be  in  illegal  restraint  of  trade,  because  the  re- 
straint was  not  general  but  partial,  proceeding  upon 
proper  consideration  and  only  securing  to  the  manu- 
facturer a  reasonable  protection  to  his  business.  There 
are  cases  in  the  State  courts  to  the  same  effect,  uphold- 
ing, under  the  circumstances  shown,  the  giving  of  re- 
bates.   See  for  example,  Walsh  v.  Dwight,  58  N.  Y. 


20  MODERN  AMERICAN  LAW  LECTURE 

Supp.  91,  where  it  was  held  that  an  agreement  by  a 
manufacturer  to  give  his  customers  a  rebate  if  they 
should  refuse  to  sell  his  goods  and  similar  goods  at 
less  than  a  certain  price,  was  not  in  restraint  of 
trade.  These  cases  may  be  regarded  as  authority  for 
the  proposition  that  a  unilateral  arrangement  which 
simply  operates  to  ^'induce"  the  dealer  to  maintain 
the  manufacturer's  price  is  not  unlawful. 

Selling  Through  Agents 

The  manufacturer  may  of  course  sell  his  goods 
through  agents,  in  which  case  he  may  legally  fix  and 
maintain  prices  exactly  to  the  same  extent  as  though 
he  were  personally  making  the  sale.  This  is  elemen- 
tary. 

Refusing  to  Sell  to  One  Who  Cuts  Prices 

The  owner  of  property  may  of  course  sell  or  refuse 
to  sell  as  he  pleases.  He  may  sell  to  one  and  refuse  to 
sell  to  another.  And  this  he  may  do  for  a  good  rea- 
son, a  bad  reason,  or  no  reason  at  all.  It  has  conse- 
quently been  held  that  a  trader  may  lawfully  refuse 
to  sell  to  one  who  cuts  his  prices,  The  Great  Atlantic 
&  Pacific  Tea  Co.  v.  Cream  of  Wheat  Co.,  227  Fed. 
Eep.  46,  affirming  224  Fed.  Rep.  566. 

STATE  COURT  DECISIONS 

The  decisions  of  the  State  courts  bearing  upon  the 
question  are  very  numerous,  and  no  comprehensive 
review  of  them  will  be  attempted.  Many  of  them 
deal  with  the  subject  of  rebates  or  single  contracts, 
about  which,  as  we  have  seen,  there  is  no  dispute. 
There  is,  in  addition,  a  line  of  cases  which  deal  with 


PRICE  STANDARDIZATION  21 

the  subject  in  its  broader  aspect,  and  which  agree 
upon  the  general  conclusion  that  subject  to  certain 
conditions,  contracts  made  by  the  manufacturer  of 
** identified"  goods  with  retail  dealers  therein,  bind- 
ing them  to  sell  at  stipulated  prices,  are  not  invalid 
but  are  legal  and  enforceable,  provided  the  arrange- 
ment does  not  create  or  tend  to  create  a  monopoly. 
Thus  it  was  held  in  Grogan  v.  Chaffee,  156  Cal.  611, 
that  a  manufacturer  of  olive  oil,  in  quantity  rela- 
tively small  compared  with  the  total  production,  may 
sell  his  oil  on  condition  that  it  shall  be  resold  at  a 
fixed  minimmn  price;  that  the  contract  will  be  en- 
forced, and  it  is  immaterial,  as  between  the  parties, 
whether  the  article  is  produced  under  patent  or  secret 
formula.  It  did  not  appear  that  plaintiff  produced 
any  large  proportion  of  the  olive  oil  sold  in  the  mar- 
ket and  the  Court  held  that  there  was  nothing  in  the 
situation  tending  to  create  a  monopoly.  Whether 
the  price  restriction  could  be  enforced  under  notice 
is  not  decided,  though  the  Court  suggestively  refers 
to  a  Massachusetts  case  (Garst  v.  Hall  &  Lyon  Co., 
179  Mass.  589),  which  holds  that  the  price  restriction 
does  not  extend  to  a  subsequent  purchaser  with 
knowledge  of  the  restriction,  but  who  has  made  no 
agreement  to  observe  it.  This  case  is  followed  by 
Ghirardelli  v.  Hunsicker,  128  Pac.  1041,  where  it  is 
held  that  the  manufacturer  of  a  certain  kind  of  choc- 
olate could  legally  impose  his  price  restrictions  upon 
retail  dealers  who  purchase  from  a  wholesaler,  bound 
to  contract  for  the  benefit  of  the  manufacturer,  with 
whom  the  retailers  make  price  maintenance  agree- 
ments. 


22  MODERN  AMERICAN  LAW  LECTURE 

There  is  an  elaborate  opinion  to  the  same  effect  by 
the  Washington  Supreme  Court  in  Fisher  Flouring 
Mills  Co.  V.  Swanson,  76  Wash.  649,  where  it  is  held 
that  a  contract  between  a  manufacturer  of  a  special 
brand  of  flour  and  retailers,  requiring  them  to  main- 
tain selling  prices,  was  valid;  since  under  the  facts 
shown,  it  did  not  tend  to  control  the  market  or  create 
a  monopoly  or  restrict  competition.  The  opinion  is 
most  instructive  and  discriminating  and  should  be 
read  in  full.  See  also  Commonwealth  v.  Grinstead, 
111  Ky.  203 ;  Garst  v.  Harris,  177  Mass.  72 ;  Garst  v. 
Charles,  187  Id.  144;  Walsh  v.  Dwight,  58  N.  Y. 
Supp.  91. 

Rule  Established  by  State  Cases 

These  cases  taken  together  seem  to  establish  that 
the  tests  to  be  applied  to  contracts  of  this  kind  are : 
(1)  whether  the  stipulation  as  to  price  maintenance 
is  of  an  ancillary  nature,  that  is,  not  primarily  im- 
posed to  raise  prices  but  to  protect  the  business  of  the 
manufacturer;  (2)  whether  it  affords  no  more  than 
reasonable  protection,  and  (3)  whether,  on  the  whole, 
the  injury  to  the  public,  by  the  restraint  on  competi- 
tion, is  slight  in  comparison  with  the  legitimate  bene- 
fit afforded  to  the  manufacturer.  These  questions 
being  determined  in  the  affirmative,  the  agreements 
are  valid,  whether  the  product  affected  be  produced 
under  secret  process  or  formula  or  not,  and  whether 
made  directly  with  the  retailer  or  through  a  jobber 
or  middleman. 

Some  of  the  recent  state  decisions  seek  to  distin- 
guish the  cases  decided  by  the  Federal   Supreme 


PRICE  STANDARDIZATION  23 

Court,  by  pointing  out  that  they  dealt  with  articles 
not  capable  of  general  production,  as  in  the  case  of 
**Sanatogen,"  a  proprietary  article  produced  by  a 
single  manufacturer ;  while  in  the  state  cases  the  pro- 
duction of  the  articles  under  consideration  was  not 
so  confined,  the  manufacturer  simply  putting  out  his 
contribution  to  the  general  supply  under  a  special 
trade  mark  or  brand.  In  other  words  the  distinction, 
pointed  out,  is  between  a  special  product  produced  by 
a  single  manufacturer  and  a  special  brand  of  a  prod- 
uct produced  generally.  In  the  first  case,  the  result  of 
price  fixing  is  to  monopolize  the  market  in  respect  of 
the  product,  while  in  the  second  case,  the  monopoly 
is  of  the  brand,  leaving  competition  as  to  the  product 
in  full  play.  Whether  the  Federal  Supreme  Court 
will  recognize  any  such  distinction  is  at  least  doubtful, 
in  view  of  the  sweeping  langTiage  of  the  opinions  thus 
far  rendered.  In  a  few  States  price  maintenance  con- 
tracts have  been  legalized  by  statute. 

The  Necessity  for  Federal  Legislation 

The  commerce  of  our  day  has  become  so  extensive 
and  state  lines  have  been  overflowed  so  completely, 
that  state  laws  and  state  decisions  upon  the  subject 
of  price  maintenance  are  of  comparatively  small  con- 
cern ;  the  rule  established  for  interstate  commerce  is 
all  important.  Hence  the  far  reaching  consequences 
of  the  recent  decisions  of  the  Federal  Supreme  Court 
referred  to  in  the  foregoing.  Under  these  decisions, 
it  would  seem  to  be  impossible  for  manufacturers  of 
"identified"  goods  of  any  sort  to  standardize  prices 
by  any  effective  method,  in  the  absence  of  enabling 


24  MODERN  AMERICAN  LAW  LECTURE 

legislation  by  Congress.  The  agency  system  cannot 
be  followed,  except  by  manufacturers  having  very 
large  capital  and  able  to  engage  in  distributing  their 
products  upon  a  large  scale.  The  rebate  system  lacks 
the  element  of  enforceability  and,  therefore,  of  cer- 
tainty. The  attempt  to  maintain  prices  by  refusing 
to  make  subsequent  sales  to  recalcitrant  dealers,  will 
produce  only  partial  and  haphazard  results.  The  de- 
mand of  those  who  favor  the  policy  of  price  standard- 
ization and  who  challenge  the  economic  wisdom  of  the 
Supreme  Court  decisions  is,  therefore,  for  legislation 
which  will  recognize  the  policy  and  legalize  contracts, 
notices  or  other  effective  means  for  carrying  it  into 
operation.  This  brings  us  to  a  consideration  of  the 
second  branch  of  the  subject. 

II 

ECONOMIC  PHASE  OF  PRICE  STANDARDIZATION 

Will  Promote  Competition  Among  Producers. 

There  are  two  ways  by  which  the  retail  prices  of 
specially  branded  goods  may  be  fixed,  (1)  by  the 
dealer  who  sells  to  the  consumer,  the  tendency  of 
which  is  to  bring  about  free  price  competition  among 
all  the  retailers,  operating  in  a  particular  market,  who 
deal  in  that  special  brand,  and  (2)  by  the  producer  of 
the  special  brand  of  goods,  which  results  in  a  uniform 
retail  price  for  the  special  brand,  and  brings,  or  tends 
to  bring,  about  free  price  competition  among  the  pro- 
ducers of  the  various  brands  of  goods  of  the  same 
kind.  The  tendency  of  the  first  method,  it  is  claimed, 
is  really  in  the  direction  of  monopoly,  since  the  small 


PRICE  STANDARDIZATION  25 

manufacturer  is  unable,  under  existing  laws,  to  stand- 
ardize his  prices  by  contract  or  notice,  while  the  large 
manufacturer  is  able  to  standardize  his  prices  by  be- 
coming his  own  distributor  under  the  agency  system ; 
and  inasmuch  as  the  latter  system  requires  great  cap- 
ital, the  tendency  will  be  steadily  in  the  direction  of 
handing  over  the  markets  to  the  very  large,  and,  con- 
sequently, to  a  few,  producers.  Thus  competition  will 
decrease  instead  of  increasing.  The  proponents  of 
price  standardization  insist  that  the  competition 
which  is  of  most  benefit  to  the  public  is  that  of  excel- 
lence, or,  as  stated  by  Judge  Ellis  in  Fisher  Flouring 
Mills  Co.  V.  Swanson,  supra :_  "The  true  competition 
is  between  rival  articles,  a  competition  in  excellence, 
which  can  never  be  maintained,  if  through  the  perfidy 
of  the  retailer  who  cuts  prices  for  his  own  ulterior 
purposes,  the  manufacturer  is  forced  to  compete  in 
prices  with  goods  of  his  own  production,  while  the 
retailer  recoups  his  losses  on  the  cut  price  by  the  sale 
of  other  articles,  at  or  above  their  reasonable  price." 
This  competition  in  quality  is  fostered  by  allowing 
the  producer  to  control  the  retail  price  of  his  product, 
since  its  effect  is  to  protect  and  steady  the  business 
and  thus  encourage  others  to  enter  the  field  of  pro- 
duction of  similar  and  competing  articles,  each  put 
before  the  public  under  its  own  special  brand.  The 
standardization  of  prices  by  contract  being  illegal, 
the  agency  plan  is  the  only  effective  alternative,  and 
this  will  not  only  result  in  building  up  the  big  manu- 
facturers and  destroying  the  small  ones,  as  it  is 
claimed,  but  it  will  have  the  further  effect,  it  is  said, 
of  gradually  eliminating  the  small  store  keepers  who 


26  MODERN  AMERICAN  LAW  LECTURE 

will  be  unable  to  stand  against  the  agencies,  chain 
stores  and  big  department  stores. 

The  negative  view. — On  the  other  hand,  it  is  point- 
ed out  that  thorough  going  comjjetition — competition 
as  to  price,  quality,  terms  and  service — is  the  most  ef- 
fective way  of  preventing  undue  or  extortionate 
prices  and  of  furnishing  to  the  public  the  most  value 
for  the  least  money.  The  cost  of  doing  a  retail  busi- 
ness varies  greatly  not  only  as  among  different  sec- 
tions of  the  country  but  among  retailers  in  the  same 
localit}^  This  difference  varies,  it  is  claimed,  among 
grocery  stores  from  12  to  22  per  cent;  hardware 
stores,  from  17  to  26  per  cent ;  dry  goods  stores,  from 
16  to  25  per  cent ;  shoe  stores,  from  16  to  27  per  cent ; 
men's  clothing  stores,  from  20  to  30  per  cent;  drug 
stores,  from  24  to  30  per  cent;  jewelry  stores,  from 
25  to  32  per  cent,  and  among  department  stores,  from 
22  to  30  per  cent.  If  a  general  system  of  pnce  main- 
tenance be  legalized,  the  effect  mil  be  to  compel  the 
most  efficient  retailers  to  sell  at  the  same  price  as  the 
least  efficient,  and  the  incentive  to  constantly  increas- 
ing efficiency  with  its  contributing  effect  toward  price 
reductions  will  be  taken  away  or  greatly  lessened.  The 
power  to  fix  retail  prices  will  enable  the  manufacturer 
to  determine  the  profits  of  the  retailer ;  to  cut  him  off 
with  a  nominal  profit  or  give  him  a  very  large  profit 
and  prevent  him  from  giving  the  public  the  benefit  of 
any  part  of  it  by  accepting  a  reduced  but  entirely  ade- 
quate and,  to  him,  satisfactory  profit  for  himself.  Un- 
der such  a  system  the  retail  store,  so  far  as  identified 
goods  are  concerned,  wall  lose  its  initiative  and  be- 
come, in  effect,  a  mere  distributing  agent.     The  ri- 


PRICE  STANDARDIZATION  27 

valry  between  competing  retailers,  wliicli  induces  each 
to  struggle  for  customers  by  selling  his  goods  as 
cheaply  as  possible  will  be  gone,  with  a  consequent  loss 
of  business  efficiency.  Instead  of  the  small  manufac- 
turers being  helped  by  legalizing  price  maintenance 
by  contract,  the  reverse,  it  is  insisted,  would  be  the 
case.  Price  standardization  and  national  advertising 
go  hand  in  hand,  and  in  a  contest  of  publicity,  requir- 
ing the  expenditure  of  large  sums  of  money,  the  small 
manufacturer  would  be  hopelessly  beaten  by  the  large 
and  wealthy.  The  tendency  would,  therefore,  be,  it 
is  urged,  in  the  direction  of  eliminating  the  small  pro- 
ducers, with  the  consequent  development  of  monopo- 
lizing aggregations  and  an  ultimate  rise  in  prices  for 
identified  goods.  So  it  is  denied  that  there  is  any  dan- 
ger from  the  present  situation,  that  the  small  retailers 
will  be  driven  out  of  business  or  injuriously  affected. 
It  is  pointed  out  that  the  chain  stores,  the  great  de- 
partment stores  and  the  small  shops  have  each  devel- 
oped in  response  to  an  economic  need ;  that  they  exist 
side  by  side  and  each  has  its  definite  function,  and  in 
certain  fields,  neither  can  invade  the  province  of  the 
other.  The  large  store  it  is  conceded  buys  in  large 
quantities  and  therefore  more  cheaply ;  but  the  small 
store  is  in  close  touch  with  local  patrons,  is  operated 
by  the  owner  directly,  is  located  where  rents  are  com- 
paratively cheap,  is  able  to  enforce  economies  of  vari- 
ous kinds  or  is  favored  by  other  circumstances  Avhich 
are  not  enjoyed  by  the  large  dealer.  This  general  sit- 
uation and  these  differences  will  continue,  it  is  con- 
tended, in  spite  of  the  further  growth  of  distributing 
agencies,  chain  stores  and  department  stores. 


28  MODERN  AMERICAN  LAW  LECTURE 

Producer,  in  Absence  of  Fixed  Prices,  Competes  with  Himself 

The  advocate  of  price  standardization,  however, 
contends  that  price  competition  among  retail  dealers 
in  identified  goods  is  in  effect  competition  of  the  pro- 
ducer with  himself.  The  very  fact  that  the  article  is 
specially  branded  shows  that  it  is  already  entered  by 
the  producer  in  a  competitive  market,  where  his  spe- 
cial brand  must  contest  for  the  favor  of  the  consum- 
ing public  against  other  goods  of  the  same  kind, 
whether  specially  branded  or  not.  Whether  a  given 
article  shall  succeed  in  this  contest  depends  upon  the 
comparative  quality  and  price.  The  producer  con- 
trols the  quality  and  is  influenced  from  motives  of 
self-interest  to  make  it  as  good  as  possible,  since  one 
of  the  determining  factors  in  the  competitive  struggle, 
in  which  his  product  must  engage,  will  be  its  superior 
quality.  In  like  manner  he  may  be  trusted,  from  like 
motives,  to  fix  the  price  as  low  as  possible,  since  that 
will  constitute  the  other  determining  factor  in  the 
struggle  for  trade.  In  such  a  situation  monopolistic 
prices  are  impossible,  and  it  is  pointed  out  that  in 
fact  hundreds  of  specially  identified  articles  are  in 
the  markets  of  the  country  being  sold  at  standard 
uniform  prices — as,  for  example,  certain  brands  of 
collars,  shirts,  hats,  toothbrushes,  breakfast  foods, 
automobiles,  etc — without  the  slightest  tendency 
toward  monopoly  being  developed. 

Price  Standardization  Will  Improve  Quality 

It  is  also  claimed  that  standard  prices  upon  iden- 
tified goods  will  have  a  strong  influence  upon  the 
quality  in  another  way.    If  retail  dealers  cut  the  price 


PRICE  STANDARDIZATION  29 

back  and  forth  to  the  point  of  demoralizing  the  mar- 
ket for  the  given  article,  intending  purchasers  will 
be  induced  to  take  a  substitute,  the  producer  will  be 
urged  to  reduce  his  prices,  and,  in  order  to  do  this,  the 
quality  will  be  impaired,  and  in  the  end  the  public 
will  gain  nothing. 

Contrary  view. — On  the  other  hand,  it  is  not  clear 
that  price  maintenance  actually  does  result  in  keeping 
up  the  quality.  Instances  are  not  wholly  unknown, 
where,  upon  the  introduction  of  some  special  brand 
of  goods,  and  for  some  time  thereafter,  the  quality 
has  been  excellent,  but  after  the  trade  has  been  secured 
and  the  confidence  of  the  public  established,  the  qual- 
ity has  been  allowed  to  deteriorate.  It  is  denied  that 
there  is  any  well  defined  tendency  to  superior  quality 
in  the  case  of  branded  merchandise,  but  on  the  con- 
trary, it  is  asserted  that  the  tendency  is  the  other 
way,  due  to  the  fact  that  the  branded  article  must 
bear  a  large  overhead  expense  for  advertising  which 
is  not  the  case  with  unbranded  merchandise.  The 
legalizing  of  price  standardization  contracts  would 
greatly  increase  thje  number  of  specially  branded  arti- 
cles, with  a  consequent  addition  to  the  volume  of  na- 
tional advertising,  the  burden  of  which  would  be 
borne  by  the  consuming  public,  either  in  the  form  of 
increased  cost  or  impaired  quality. 

Market  Demoralized  by  Cutting-  Prices 

Again  it  is  urged  by  the  advocates  of  price  stand- 
ardization, that  to  allow  retailers  to  fix  prices  on  brand- 
ed goods,  will  result  in  constantly  fluctuating  prices  ; 
rendering  the  market  unstable;  preventing  dealers 


30  MODERN  AMERICAN  LAW  LECTURE 

from  carrying  adequate  stocks,  for  fear  of  not  being 
able  to  meet  the  prices  of  competitors ;  inducing  cus- 
tomers to  go  from  one  store  to  another,  in  order  to  find 
the  cheapest;  resulting  in  the  unprofitable  increase 
of  sales  forces,  loss  of  time,  etc.  As  a  result  the  mar- 
ket will  become  demoralized,  dealers  will  refuse  to 
handle  the  branded  article,  and  in  the  end,  society  will 
lose  more  than  it  will  gain  by  the  reduction  of  prices. 
This  claim  denied. — On  the  other  side,  it  is  pointed 
out  that  there  are  many  patented  and  branded  articles, 
the  resale  of  which  has  never  been  fixed  by  the  manu- 
facturer, but  has  been  left  entirely  to  the  retail  deal- 
ers, yet  no  demoralization  has  resulted.  Goods  of  this 
character,  as  well  as  unidentified  goods,  have  been  dis- 
tributed in  the  same  manner  as  have  identified  goods, 
upon  which  retail  prices  are  fixed,  and  differences  in 
results  have  not  been  manifested.  Under  a  system  of 
free  competition  among  dealers,  economies,  resulting 
in  lower  prices,  are  encouraged ;  under  price  standard- 
ization, the  public  will  be  denied  all  benefit  from  these 
economies. 

Cut  Prices  as  "Bait"  to  Induce  Buying  of  Other  Goods 

On  behalf  of  the  policy  of  price  standardization  it 
is  asserted  that  it  is  the  practice  of  many  large  retail 
establishments  and  department  stores,  to  advertise 
one  or  more  branded  articles  for  sale  at  a  price  under, 
and  sometimes  very  much  under,  the  retail  price  fixed 
by  the  manufacturer,  for  the  purpose  of  inducing  in- 
tending purchasers  to  believe  that  similar  reductions 
have  been  made  upon  other  goods,  advertised  at  the 
same  time,  upon  whicn  there  is  no  standard  price.    In 


PRICE  STANDARDIZATION  31 

this  way,  it  is  asserted,  the  public  is  victimized,  and 
while  it  may  profit  by  the  reduction  upon  the  particu- 
lar branded  article,  this  is  more  than  offset  by  the  en- 
hanced price  it  is  betrayed  into  paying  for  other 
things.  The  quantity  of  the  standardized  goods  which 
each  customer  may  buy  is  generally  limited,  and  is 
usually  of  a  kind  weU  known  in  the  community,  upon 
which  the  selling  price  has  been  long  fixed  and  widely 
advertised.  The  psychology  of  such  a  situation  is 
clear.  It  is  an  appeal  to  the  customer  to  believe  that, 
since  the  price  has  been  lowered  upon  this  article  with 
which  he  is  so  familiar,  prices  upon  other  articles, 
with  which  he  is  not  familiar,  have  been  likewise  low- 
ered. The  practice  has  been  »3iaracterized  as  ''cut 
throat  merchandising,"  "fake  advertising,"  "bait," 
and  by  other  epithets.  Here  is  the  way  it  works  out 
in  practice  according  to  the  advocates  of  price  stand- 
ardization :  A  man  sees,  in  a  large  display  advertise- 
ment of  reduced  prices  upon  all  sorts  of  men's  ap- 
parel, that  "Arrow"  Collars  are  to  be  sold  for  twelve 
cents.  He  knows  that  the  standard  price  is  twenty 
cents,  and  determines  to  lay  in  a  supply.  Upon  in- 
quiry he  may  be  informed  that  his  size  is  not  in  stock, 
or  the  number  he  is  allowed  to  purchase  may  be  lim- 
ited. Suppose,  however,  he  buys  half  dozen  at  a  sav- 
ing of  forty-eight  cents.  Influenced  by  his  bargain, 
however,  he  buys  several  other  articles  for  which  he 
pays  more  than  the  usual  price,  and  his  saving  on 
the  well  known  article  has  been  offset,  or  more  than 
offset,  by  overcharges  upon  the  other  articles.  He 
has  thus  injured  himself,  injured  other  dealers,  who 
cannot  afford  to  make  the  cut  in  price,  and  injured 


32  MODERN  AMERICAN  LAW  LECTURE 

the  manufacturer,  whose  energy,  enterprise,  and  ex.* 
pensive  campaign  of  publicity  has  built  up  a  reputa- 
tion and  a  trade  for  the  articles.  The  so-called  * '  bait, ' ' 
it  is  said,  is  peculiarly  effective  in  the  case  of  women, 
who  are  natural  bargain  hunters.  The  tendency  of 
price  cutting  is  to  drive  the  article  out  of  the  hands 
of  small  dealers  by  making  it  unprofitable  to  carry  it, 
and  the  consumer,  not  being  able  to  secure  it  readily, 
is  induced  to  take  an  inferior  substitute. 

The  negative  view. — The  opponents,  however, 
argue  that  the  consumer  is  distinctly  benefited  by  the 
saving  he  is  able  to  make  on  account  of  these  reduc- 
tions. That  he,  and  especially  ''she,"  is  not  lured  by 
the  advertised  reductions  in  price  upon  standard 
priced  articles,  to  buy  other  high  priced  goods.  That 
the  average  buyer  is  discriminating  and  is  not  misled 
in  any  such  way  as  is  claimed.  That  the  practice  is  in 
any  way  dishonest,  or  intended  as  "bait,"  or  expected 
to  deceive  intending  customers,  is  strenuously  denied. 
Price  cutting  of  the  character  in  question  is  simply 
a  form  of  advertising.  It  brings,  and  is  intended  to 
bring,  people  into  the  advertiser's  place  of  business, 
and  amounts  simply  to  a  legitimate  inducement  to 
that  end.  Cut  price  advertising  is  general,  but  the 
attention  of  the  average  person  is  more  instantly  ar- 
rested by  an  advertisement  of  a  reduced  price  upon 
some  standard  article  whose  general  price  is  well 
known.  The  effect  is  to  increase  the  sales  of  the  stand- 
ard article  and  thus  help  the  manufacturer,  who  ob- 
tains his  wholesale  price  in  any  event;  to  help  the 
advertiser,  by  bringing  more  customers  to  his  place 
of  business,  and  increasing  his  trade ;  and  to  help  the 


PRICE  STANDARDIZATION  33 

customer,  by  giving  him  something  at  a  less  price  than 
he  would  otherwise  pay. 

The  Manufacturer's  Interest 

The  manufacturer  of  this  class  of  goods,  it  is  urged, 
has  a  certain  moral  right  to  fix  the  prices  at  which  they 
shall  be  sold.  He  advertises  them  widely  at  great  ex- 
pense, and  it  is  he,  and  not  the  dealer,  who  really 
creates  the  market  which  the  dealer  enjoys.  The 
public  becomes  used  to  the  uniform  price,  and  expects 
it,  and  becomes  suspicious,  if  for  any  reason  it  is  al- 
tered. The  manufacturer  is,  therefore,  bound  to  stand 
behind  the  price  and  does  not  advance  it  with  in- 
creased cost  of  production,  because  it  is  to  his  advan- 
tage to  retain  the  price  with  which  the  public  is  fa- 
miliar. Cutting  prices  makes  it  difficult  to  sell  again 
at  the  regular  price. 

The  Opposing  Interest  of  the  Customer 

But,  it  is  said,  on  the  other  hand,  if  the  nianuf  ac- 
turer  enforces  a  uniform  price,  every  purchaser  must 
pay  the  same  wherever  he  may  be  or  however  he  pays. 
The  purchaser  who  lives  next  door  to  the  factory  must 
pay  as  much  as  he  who  is  thousands  of  miles  way,  and 
he  who  pays  cash  and  buys  extensively  must  pay  as 
much  as  he  who  gets  credit  and  buys  little.  It  is 
unfair  to  deny  the  customer  the  benefit  of  these  in- 
herent advantages. 

Investigation  of  the  Subject 

The  foregoing  does  not,  and  is  not  intended  to,  ex- 
haust the  arguments  for  and  against  the  policy  of 


34  MODERN  AMERICAN  LAW  LECTURE 

price  standardization.  These  are  so  many  and  so 
copious  that  in  the  course  of  a  discussion,  such  as  this, 
they  cannot  be  enumerated  but  only  illustrated.  The 
question  has  been  the  subject  of  repeated  investiga- 
tions on  the  part  of  the  Committee  on  Interstate  and 
Foreign  Commerce  of  the  National  House  of  Repre- 
sentatives. The  testimony,  briefs  and  legal  and  eco- 
nomic arguments  upon  either  side  will  be  found  in  the 
hearings  of  the  committee  on  H.  R.  13305,  63rd  Con- 
gress, February  27,  1914- January  9,  1915 ;  on  H.  R. 
13568,  64th  Congress,  May  30- June  1,  1916;  and  on 
the  same  bill,  January  5-11,  1917. 

Ill 

PROPOSED  FEDERAL  LEGISLATION 

The  so-called  Stephens- Ashurst  Price  Maintenance 
BiU  was  introduced  in  the  64th  Congress  (H.  R. 
13568 ;  S.  5064)  and  has  been  reintroduced  in  the  pres- 
ent Congress  (H.  R.  212)  and  is  now  pending  before 
the  House  Committee  on  Interstate  and  Foreign  Com- 
merce. Briefly  stated,  it  authorizes  any  grower,  pro- 
ducer, manufacturer  or  owner  of  any  article  of  com- 
merce under  trade  mark  or  special  brand,  to  prescribe, 
in  any  contract  of  sale  thereof,  the  uniform  prices  and 
manners  of  settlement  at  which  the  different  qualities 
and  quantities  may  be  resold,  whenever  the  contract 
constitutes  a  transaction  in  foreign  or  interstate  com- 
merce. It  provides  that  no  vendor  shaU  have  any 
monopoly  or  control  of  the  market  for,  or  be  a  party 
to  any  price  agreement,  combination  or  understanding 


PRICE  STANDARDIZATION  35 

respecting  articles  of  the  same  general  class  as  those 
covered  by  the  contract  of  sale.  Provision  is  made  for 
filing  with  the  Federal  Trade  Commission  a  statement 
of  the  trade  mark  or  special  brand,  and,  from  time  to 
time,  a  schedule  of  the  uniform  prices  of  sale  to  whole- 
sale and  retail  dealers,  ''from  whatever  source  ac- 
quired," and  to  the  public.  Prices  are  to  be  uniform 
'*to  all  dealers  in  like  circumstances  differing  only 
as  to  grade,  quality,  or  quantity  of  such  articles  sold, 
the  point  of  delivery  and  the  manner  of  settlement," 
such  differences  to  be  set  forth  in  the  schedule.  Dis- 
crimination is  forbidden,  in  favor  of  any  vendor  "by 
the  allowance  of  a  discount,  rebate,  or  commission  or 
by  grant  of  any  special  concession  or  by  any  device 
whatsoever." 

Contracts  may  provide  for ' '  disposal  sales  at  appro- 
priate times,"  during  which  dealers  may  sell  at  other 
than  the  uniform  prices,  provided  the  articles  shall 
have  first  been  offered  to  the  vendor,  in  writing,  at 
the  price  paid  by  the  dealer,  and  such  vendor  "not 
less  than  thirty  days  prior  to  the  date  set  forth  for 
the  next  sale,  after  reasonable  opportunity  to  inspect 
such  article  or  articles,  shall  have  refused  or  neglected 
to  accept  such  offer." 

Provision  is  also  made  for  sales  without  regard 
to  the  uniform  price  in  case  the  dealer  discontinues 
the  sale  of  the  article,  or  in  the  course  of  winding  up 
his  business,  or  if  he  becomes  bankrupt  or  goes  into 
the  hands  of  a  receiver,  or  if  the  articles  become  dam- 
aged, deteriorated,  or  soiled;  provided,  the  vendor 
be  given  opportunity  to  purchase  under  conditions 
which  are  substantially  the  same  as  those  prescribed 


36  MODERN  AMERICAN  LAW  LECTURE 

for  disposal  sales,  or,  in  case  of  damaged  goods,  an 
opportunity  to  exchange  for  similar  articles  not 
damaged. 

Sales  to  the  United  States,  to  State  and  public 
libraries,  and  to  certain  other  institutions  are  ex- 
cluded from  the  operation  of  the  bill. 

Objections  to  Proposed  Law 

Conflicting  rule  as  to  State  and  Interstate  Com- 
merce.— The  provisions  of  the  bill  are  confined  to  for- 
eign and  interstate  connnerce;  necessarily  so,  of 
course,  because  of  the  limitations  upon  the  Federal 
power.  It  is  urged  that  this  will  result  in  great  con- 
fusion, since  articles  moving  in  interstate  commerce 
will  be  subject  to  one  rule  and  those  within  the  State 
to  another  rule.  To  this  it  is  replied  that  the  bill 
would  in  fact  harmonize  rules  which  at  present  con- 
flict, since  its  provisions  are  now  recognized  law  in 
the  States.  To  the  objection  that  the  proposed  law 
would  mean  a  complete  readjustment  of  business,  it 
is  answered  that  business  has  already  been  adjusted 
on  the  theory  of  the  bill,  and  it  is  the  decisions  of  the 
Supreme  Court  which  threaten  the  only  element  of 
confusion. 

Not  sufficient  to  exclude  monopolies. — The  bill,  it  is 
urged,  is  not  sufficiently  definite  to  prevent  its  utiliza- 
tion for  the  benefit  of  monopolies.  While  it  provides 
that  the  vendor  shall  not  have  any  monopoly  or  con- 
trol of  the  market,  it  will  be  exceedingly  difficult  to 
determine  the  status  of  the  vendor  in  advance,  and 
the  government  will  be  in  constant  danger  of  approv- 


PRICE  STANDARDIZATION  37 

ing  contracts  and  schedules  where  the  vendor  does 
in  fact  control  the  market.  The  bill  excludes  a  vendor 
who  has  an  agreement,  combination  or  understanding 
with  a  competitor  to  maintain  prices,  but  there  is  noth- 
ing to  prevent  competitors  from  filing  identical  or 
nearly  identical  price  schedules,  and  the  difficulty  of 
showing  any  agreement  or  understanding  would  be 
very  great.  A  more  definite  provision  would  seem  to 
be  necessary  on  this  subject. 

What  is  meant  by  '' oivyier^f — The  meaning  of  the 
word  "owner"  in  the  bill  is  not  clear.  Is  it  to  be  con- 
strued in  connection  with  the  other  words  "grower," 
"producer"  and  "manufacturer,"  who  are  all  origi- 
nators of  articles,  in  accordance  with  the  rule  of  statu- 
tory construction  of  associated  words,  as  meaning  only 
owners  wdio  are  originators,  or  will  it  apply  to  any- 
one who  owns  an  article?  If  the  latter,  then  the  job- 
ber, or  wholesaler,  or  indeed  anyone  is  at  liberty  to 
adopt  a  special  brand  and  enjoy  the  benefits  of  the 
proposed  law. 

Discriynination  for  benefit  of  favored  dealers. — The 
bill  provides  that  prices  shall  be  uniform  to  all  dealers 
"in  like  circumstances."  The  circumstances  of  no 
two  cases  are  likely  to  be  precisely  alike  and  the 
phrase  would  probably  be  held  to  mean  substantially 
like  circumstances.  There  is  here  much  room  for 
the  play  of  favoritism.  So  in  the  case  of  seasonal 
and  other  emergency  disposal  of  goods,  there  is 
opportunity  for  favoring  dealers.  To  these  objec- 
tions it  is  replied  that  it  is  always  so  much  to  the 
advantage  of  the  producer  to  treat  all  dealers  with 
fairness  that  discrimination,  which  has  been  of  in- 


38  MODERN  AMERICAN  LAW  LECTURE 

frequent  occurrence  in  the  past,  is  not  likely  to  make 
It?  appearance  under  this  legislation. 

Emergency  sales  too  restricted. — It  is  pointed  out 
that  the  course  to  be  followed,  before  goods  can  be 
sold  at  less  than  the  uniform  price,  is  so  troublesome 
and  subject  to  such  delay  as  to  be  practically  un- 
workable. The  loss  to  the  dealer  by  delay  in  the 
case  of  seasonal,  perishable  or  damaged  goods  may 
be  very  great. 

It  is  said,  however,  in  reply,  that  the  bill  is  not 
mandatory  and  in  those  industries  where  emergency 
sales  are  necessary,  resale  prices  would  not  be  fixed, 
for  fear  dealers  would  not  handle  the  goods,  and 
that  usually  sales  are  planned  sufficiently  in  advance 
to  allow  the  delay  contemplated  by  the  bill,  without 
hardship. 

Discounts  to  dealers,  none  to  consumers. — The  bill 
allows  discounts  to  dealers  based  upon  grade,  quality, 
etc.,  but  none  to  customers  for  like  causes.  It  is  said, 
however,  that  there  are  other  ways  in  which  tlie 
dealer  can  give  his  customers  the  benefit  of  legiti- 
mate preferences  for  these  or  like  causes  without 
establishing  the  undesirable  practice  of  price  dis- 
crimination in  the  case  of  small  consumers  of  staple 
products. 

Other  objections  are  urged;  among  them,  that  the 
provisions  for  fixing  retail  prices  by  filing  schedules 
puts  too  much  power  into  the  hands  of  the  producer, 
and  that  provision  should  be  made  for  some  method 
by  which  it  may  be  determined  that  the  prices  are 
no  greater  than  necessary  for  the  protection  of  the 
producer. 


PRICE  STANDARDIZATION  39 

CONCLUSION 

If  it  is  finally  deemed  advisable  to  authorize,  by 
legislation,  the  fixing  and  maintenance  of  uniform 
prices  upon  identified  goods,  the  Stephens-Ashurst 
Bill,  in  its  general  scope,  affords  a  reasonable  and 
fair  foundation.  Before  its  enactment  into  law,  the 
foregoing  objections  should  be  carefully  considered. 
Stronger  and  more  definite  provisions  should  be  in- 
serted to  guard  against  monopoly  or  market  control ; 
to  prevent  discrimination  in  favor  of  one  retailer  to 
the  injury  of  another;  to  clear  up  the  ambiguity  as 
to  whether  the  bill  applies  to  price  fixing  by  notice 
as  well  as  by  contract ;  to  simplify  the  seasonal  and 
other  emergency  sales  of  uniform  price  goods;  and 
to  insure  the  fixing  of  retail  prices  within  the  limit 
of  necessary  protection  to  the  producer. 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 

This  book  is  DUE  on  the  last  date  stamped  below. 


MAY  2  3  1972 

UCLA  LAW  LIBRAR 

MAY  1  8  2G03 


Form  L9-Series4939 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


L^aulord  — — 

GAYLAMOUNT'K) 
PAMPHLET  BINDER 

^_^       Syracuse,  N.Y. 
— — -        Stockton,  Calif.' 


AA    000  855  818    i 


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Southe 


